John Embry continues:

“You have to remember that until the 1980s, virtually all of the mining in the world was underground mining, and the grades were a lot higher than they are now.  This is because a lot of the gold that was easy to mine has already been mined and we are having to go deeper and deeper.

Then we had heap leaching which was the revolution in the 1980s.  So consequently, a lot of these close to the surface, very low-grade ore bodies were able to be exploited by heap leaching.  This led to a very large increase in the amount of production....

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“The whole dynamic of the industry changed for a while.  The problem now is that the easy to exploit heap leaching opportunities around the world have already been exploited.  So a lot of the developments that started back in the 80s and 90s are running out.

The industry is faced with the daunting challenge of replacing all of these sites which are going out of production in the next few years.  I don’t believe we are going to be able to find enough new ore bodies to exploit, in order to replace the production going offline. 

So I totally concur with Keith Barron on the idea that gold production could fall quite significantly over the next five to ten years, irrespective of what the gold price does.  To be fair, if the gold price were to go to $10,000, which is possible, then down the road you might be able to get some increased production.

But that’s something that’s in the future.  We are just talking about what’s reasonable in the next five to ten years, and in my opinion gold production is going nowhere but down.  Keith could be right that production will collapse.

What’s important to understand, Eric, is that the gold price has been seriously suppressed.  One of the reasons gold stocks have been under pressure is the fact that they are reporting terrible results.  They are reporting terrible results because the gold price is too low and the costs related to mining have gone up a lot.

Even though the price of gold has gone from $250 to $1,700, it’s still an uneconomic business.  We probably need $3,000 gold based on current costs to get a really robust rate of return.  Gold mining deserves a really robust rate of return because it’s an extremely hard and risky business.

I find it fascinating that they just beat the heck out of all of these gold stocks because there have been some lousy earnings reports.  I’ve always believed that stocks are discounting mechanisms, and I believe gold prices are going dramatically higher.  So investors should be looking at the earnings potential of these things down the road, not worrying about what they are doing now.

I think the most recent correction in the mining stocks was preposterous, and it has created an even better buying opportunity.  But most people, because they don’t understand the fundamentals, are getting spooked out of them.

So Keith Barron is correct because the problem is twofold:  Existing production is going to go down a lot.  So for the major mining companies, to achieve growth, not only are they going to have to replace existing production, which will fall significantly, but they will have to replace that plus even more development.

The problem is that with the current gold price and what has taken place in the share environment, I don’t see any possibility of that taking place.  One of the great pieces of misinformation that has been spread by the agents of the people suppressing the price of gold, is that at these higher gold prices we would experience a boom in gold mining.  Nothing could be further from the truth.”

Embry also added:  “If you stop to think about it, Eric, the fact that the gold price is currently $170 lower at the end of August of one year ago, given what has gone on with respect to QEs, wars, and financial implosions, it’s preposterous that the gold price is where it is.

But it shows the power of paper, and that’s the reason we have all of these derivatives because you can control markets quite effectively, until you can’t.  At that point the price of gold is going to go crazy.  Thing about the fact that the shadow banking system is $67 trillion, and the leverage that creates in the system.  I just think that the ‘end’ of this is going to be horrific.”

© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

The interviews with Don Coxe (BMO $538 billion), Ben Davies, Art Cashin (UBS $612 billion), Nigel Farage, Bill Fleckenstein and Rob Arnott (RALLC $100 billion) are available now.  Also, be sure to listen to other recent KWN interviews which included Gerald Celente, John Hathaway, John Embry and Stephen Leeb by CLICKING HERE.

Eric King

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